Private mortgage (hypothec) lenders

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In my practice, I have recently noticed a greater occurrence of private mortgage lending. Banks, trust companies, mortgage companies and other financial institutions remain the primary mortgage lenders in this country. However, individuals and smaller companies lend money as well and can obtain, to guarantee the repayment of a loan, mortgages on immovable properties, also known as real estate, that is, land and buildings. (For shorthand, I will refer simply to « property ».)

In Quebec, what we commonly refer to as a « mortgage » is legally defined as an « hypothec ». An hypothec is similar, but not identical, to the common law notion of a mortgage. In Quebec, an hypothec gives the mortgage lender certain real rights and allows him to follow the property into whatever hands it is transferred, until such time as the loan is paid.

Your Rights as a Mortgage Lender

The primary rights of any mortgage lender involve his ability to force a surrender of the property should the debt not be repaid. So, for example, should the borrower fail to make two or three consecutive monthly payments that he would be required to make according to a deed of loan and hypothec, then the lender can decide what he would like to do.

In principal, the choice is between:

a) A taking in payment remedy; orb) A judicial sale remedy.

In both cases, he must send to the borrower a prior notice of the exercise of an hypothecary right. This is commonly known as a 60-day notice. The notice must be sent to his borrower and thereafter must be published in the land registry. It is known as a 60-day notice because, for 60 days after the date of publication, he cannot proceed to the next step, which is a lawsuit.

If he proceeds by way of a taking in payment remedy, the aim is to become the owner of the property once a court judgment is issued. This also has the effect of extinguishing the debt. In other words, once the lender becomes owner of the property, the borrower no longer owes any sums pursuant to the loan that was guaranteed by the mortgage.

On the other hand, if he proceeds by a judicial sale remedy, the property will be sold (normally by bailiff) and the proceeds of the sale will be used to pay the creditors, including the lender, according to the order of preference established by law and calculated by the bailiff. If the lender does not receive enough money to entirely pay his claim, his claim continues to exist for the unpaid balance against the borrower. Of course, the problem often is that, having sold the debtor’s main asset, it may be very difficult, if not impossible, to collect any further sums. However, that is both the choice and the risk that the lender faces.

Should the sums owing not be paid within the 60 days of the publication of the prior notice, at that point the lender has the right to bring a motion to the Court, a lawsuit in other words, to force surrender of the property. The lawsuit must be served to the debtor and presented at the court on an appropriate date. The borrower, like any other person sued before the court, can, if he so chooses, attempt to present a defence. Quite often in these kinds of cases, no defence is available and none is presented. It then becomes a matter of fulfilling the proper procedures in order to get a judgment by default from the court.

In virtue of the judgment, if it is a taking in payment judgment, the lender becomes owner the property retroactive to the date he published the prior notice and, as well, all 2nd mortgages registered against the property become of no effect. This is the advantage of his priority.

If the judgment is for a judicial sale remedy, then he must proceed according to the judgment and its limits to sell the property, and the revenues will be used to pay the creditors according to the legal order of preference.

In both cases, normally the judgment must be served to the borrower, to allow him to voluntarily surrender the property, or if not, to proceed to an eviction by bailiff.

Provision For Legal Costs

There are costs to be assumed by the lender who engages in these procedures, in terms of registration fees, court fees and bailiff costs. In principal, these costs are reimbursable from the borrower, but of course there may be a problem in collecting these costs. For the judicial sale remedy, these costs are payable from the proceeds of the sale but that means that, normally, less of the principal debt will be paid and the lender will be stuck with the same problem, that is, collecting the balance of the unpaid loan.

While an individual lender might undertake these procedures by himself, if he knows how to navigate the system of the registry and the courts, and while a private lending company might register the 60-day notice by itself if it can meet the requirements of the land registry, for a lawsuit by a private lender, this matter cannot go before the Small Claims Court. Therefore, a private lending company must, by law, engage a lawyer, either an outside attorney or internal counsel, to do the court procedures necessary to exercise its rights under the mortgage that guarantees the loan to its borrower.

For all private lenders, whether individuals or companies, it would be very useful to consult a lawyer before proceeding to decide how to have your rights respected in virtue a deed of loan and hypothec.